To invest or not to invest?

The cannabis industry is booming, but beyond the headlines lies an uncertain future

A friend of mine sent me a message a few weeks back, asking if I thought it would be smart to invest in marijuana or CBD.

My short answer was “no.” For the vast majority of people looking to invest for retirement, to put money away for their children’s education or to simply build a nest egg for all the reasons it’s important to have that extra cash, there are far more reliable ways to do so than cannabis.

But, like the cannabis plant itself, it’s a subject far too complex for a short answer.

“Should I invest in pot?” is the same as asking if you should invest in the World Wide Web 20 years ago. The potential is astronomical, and the hype is almost unbearable. But we don’t know what the world of legal weed is going to look like 10 years from now — just as most of us couldn’t comprehend how a search engine like Google or a social network like Facebook could be worth hundreds of billions of dollars. Most people who were around for the dot-com boom didn’t realize that Amazon would become the world’s most valuable company (I was a teenager, so I knew everything, of course). Looking back, it seems obvious that people would flock to the convenience of online shopping, but we couldn’t predict how truly disruptive the internet would be.

But the fear of missing out on another boom might be part of what triggers another bubble. The valuations of some publicly traded cannabis companies have soared into the billions, despite the fact that most of these companies have yet to turn a profit.

A savvy investor who knows how to ride the waves of peaks and valleys can clearly make a boatload of money. But watching a company like Tilray surge past $200 a share, then sink below $100 less than a week later, then dip below $30 for a moment in the 10 months that followed, is enough to make the average Joe seasick. Tilray’s an easy example to look at because of its meteoric IPO, followed by a steady downturn and questions about the company’s CEO offloading more than 100,000 shares of his own. But most of the major public companies have weathered their own storms. Cronos dipped below $7 a share shortly after recreational marijuana went legal in Canada, then bounced over $20 and settled in at somewhere in the $12 range. Canopy Growth, known as the world’s largest cannabis company, continues to ride through choppy waters: $55, $33, $46, $27, $50, $40, $52, $38, $24 — all within the last year. Canopy’s biggest asset — a $3.8 billion investment from alcohol titan Constellation Brands — could prove to be its biggest challenge: how to spend that money wisely and make smart acquisitions without falling into the trap of writing blank checks, while also satisfying shareholders’ thirst for profits.

But companies like Canopy and Cronos and Tilray are obviously playing a long game. They’re not investing all that money just dominate the Canadian market with its 40 million residents. They’re looking at the global market, exporting cannabis to Europe, investing in South American production and/or inching into the United States as they wait for the border floodgates to open with a major shift toward legalization.

Now, somewhere in this column I should note that I’m not a finance expert by any stretch of the imagination. I have a degree in English and I took one math class my entire college career. Cannabis stocks aren’t even a subject we follow closely at Marijuana Venture. But I read voraciously and I’m constantly researching the industry. I talk to hundreds, if not thousands, of people every year from both inside and outside the industry, trying to understand better where the industry is at today and where it might be headed tomorrow.

My advice — and I hesitate to even call it that — would be pretty similar to that which any investment adviser would say: Risk only what you can afford to lose; don’t put all your eggs in one basket; due diligence is critical; there’s no such thing as a free lunch; and get-rich-quick schemes are almost always a sure way to lose money even quicker.

Hopefully you or your investment adviser have a better understanding of financials than I do and can interpret the important inner workings of these companies and how they’re managed.

But those numbers might not tell the whole story. Many of these publicly traded companies put a ton of energy into cultivating their own image in the press, without necessarily addressing the bigger picture. Paying closer attention to the industry itself, and not what the financial analysts and marketing professionals are saying, gives me plenty of reason to be skeptical about the “next great investment opportunity.”

For example, beware of “luxury” cannabis brands. I’ve seen little evidence that such a thing even exists. I’m not sure buying weed requires an experience akin to shopping for jewelry, but it probably works in certain communities. I do believe in the long run there will be high-end products that cater to the discerning consumer, just as there are high-end wines, more expensive craft beers and premium brands in every product from cars to clothing. After all, every cannabis consumer says quality is one of the most important factors in their buying decisions. But in practice, most people just want a $3 pre-roll or a relatively inexpensive edible. Like any product, people want quality, but they want it to be affordable. They don’t need — or even want — “the absolute best.” For every bottle of La Fin du Monde sold by grocery stores, they probably sell a thousand cases of Coors Light.

Everybody says they’ve got the secret sauce. Few, if any, actually do. Whether it’s new-fangled technology that can increase production efficiency, a new mode of consumption that consumers will flock to, or an executive team with the best and brightest that corporate America has to offer, most of these companies aren’t doing anything groundbreaking. Reading some of the hype-heavy headlines, one would think cannabis beverages are the Next Big Thing. And maybe they will be eventually, but right now, they probably account for 2% of the market, even in the most mature markets in North America.

Beyond the fact that cannabis is the fastest growing industry in North America, the comparison between tech and marijuana is, in my opinion, pure hyperbole.

At its very core, cannabis is two industries: horticulture and retail. People grow plants; people sell plants. If not for federal illegality and unnecessarily complicated regulations, it’s a pretty simple business. High technology is decidedly not simple. I can’t create my own Facebook. I can’t produce my own iPhone. I can’t manufacture military-grade machinery. I can’t write computer software. But with a couple seeds, I could easily grow my own cannabis in my backyard. That tells me the future of cannabis probably looks more like a tomato than a solid gold nug.

And to some degree, corporate cannabis is what so many people feared. There are too many people looking for a quick buck, willing to bend or break the rules to advance their own interests — the CannTrust situation, with the company allegedly growing in unlicensed facilities and selling that product overseas, comes to mind. Big Weed operates no differently than any other corporate enterprise — and based on their sky-high valuations, might be under even more pressure to perform. Once companies are beholden to stock prices and shareholders, they’ve got a fiduciary duty to put profits ahead of people — and ahead of the industry as a whole. Not all companies will take this mandate as a license to cut corners, break rules and screw the competition, but some will, and these moves could result in lost licenses, damage to a brand’s reputation or even lawsuits and fines.

One cannabis executive said on Twitter recently that he’s met more bad actors in five years of the legal market than he’d met in 10 years of cannabis before that.

I probably sound unimpressed by the business potential of the cannabis industry, but that’s not the case at all. I believe wholeheartedly in the massive growth potential of this industry. The millions of dollars invested will lead to breakthroughs in indoor horticulture. More research will bring about medical advancements and a better understanding of how cannabinoids can be used to treat a variety of ailments — real science, not the anecdotal evidence upon which we’ve relied for years.

There are plenty of reasons to be bullish on cannabis — whether that means buying stock in public companies or investing in smaller, independent operators — but I think it’s really important that people understand the hype and how to look beyond it, and for people in my line of work to be willing to point out the contradictions.

The financial engineers who run major cannabis companies will probably make money by orchestrating these deals, but whether the same can be said of retail investors is anybody’s best guess right now.

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